Expanding Crowdfunding

In September, Representative Patrick McHenry introduced proposed legislation to make the process of raising capital through crowdfunding exempt from federal securities laws.The Entrepreneurial Access to Capital Act, HR 2930, has received house panel support. His proposal is actually quite straight forward. Under the proposal, the Securities Act of 1933 (15 U.S.C. 77d) would be amended by the addition of a new section 4(6) to provide that individuals can purchase up to the lower of $10,000 or 10 percent of the investor’s annual income (based on the investor’s own declaration of income) for investments up to $5 million.

More importantly, the crowdfunding provisions exempt the offering from state filing obligations. The law does not, in fact, require actual crowdfunding. While IndieGoGo and KickStarter provide tools to raise donations, sales and even funding, the law is not limited and could create a new business for Facebook, Google and other social media sites.

The Wall Street Journal has recently identified analysts both in favor and against the proposal, but when it is unlinked from the crowdfunding projects of independent artists, the provision has great promise.

The antifraud provisions of state and federal law do not go away. Swindlers offering promises that they cannot keep or designed to steal are committing fraud and will be subject to both civil and criminal laws. Undoubtedly, it will be a bit easier to float the fraudulent proposals among the legitimate – but unsuccessful – attempts of other businesses, but criminals are already busy. This might change some criminal strategy but it is unlikely to create new criminals.

The greater threat to the economy is the lack of capital for high-risk small businesses and creative enterprises. Currently, opportunities for high-risk economic participation exist only at the top of the pyramid. Many of these fail; others succeed. Most investors believe in the goals more than they expect economic rewards. A paternalistic law that dramatically increases the financial costs of raising low amounts of money is not really helping the investors, the economy or the creative culture in America. The proposal is simple. It is a stimulus everyone can support.